Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

But you already know that you can't just go out and buy the stocks with the lowest multiples. Companies can trade at dirt cheap prices for a number of dire reasons, including low growth prospects, skepticism about earnings, or high risk of filing for bankruptcy protection.

These dangerous stocks can quickly crater. Buy too many of them, and you'll increase your own risk of bankruptcy.

Thus, for a company to be truly undervalued, Damodaran says in his book Investment Fables: "You need to get a mismatch: a low price-to-earnings ratio without the stigma of high risk or poor growth."

Of course, you're unlikely to find any high-growth, low-P/E companies out there. But Damodaran suggests setting a reasonable minimum threshold for earnings growth, such as 5%. There are also various ways to minimize risk, including staying away from volatile stocks or companies with dangerous balance sheets.

The screen's the thingWe're looking for companies with low price-to-earnings multiples, but also a relatively low amount of risk, and the potential for reasonable growth. Our screen today will cover the best value plays in the "Materials" sector, as defined by my Capital IQ screening software.

There are 176 such companies with market caps topping $500 million on major U.S. exchanges. They have an average forward P/E of 20.1. Here are my parameters:

To stay away from bankruptcy risk, I used Damodaran's suggestion and only considered companies with total debt less than 60% of capital.

In hopes of capturing a reasonable amount of growth, I looked at Capital IQ's long-term estimates and kept only companies expected to grow EPS at 5% annually or better over the next five years. Furthermore, I required at least 5% annualized growth over the past five years.

Of the 47 companies passing the screen, here are the 15 with the lowest forward price-to-earnings multiples:

Company

Market Cap (in millions)

Forward P/E

Debt-to-Capital

Estimated EPSGrowth

NewMarket(NYSE: NEU)

$1,409

8.4

35%

10%

Lubrizol(NYSE: LZ)

$6,174

9.2

38%

23%

Stepan(NYSE: SCL)

$563

9.4

32%

15%

Freeport-McMoRan Copper & Gold(NYSE: FCX)

$33,575

9.7

28%

10%

A. Schulman(Nasdaq: SHLM)

$555

9.8

23%

12%

Schweitzer-Mauduit International(NYSE: SWM)

$907

11.6

9%

17%

HB Fuller(NYSE: FUL)

$948

11.7

34%

9%

RPM International(NYSE: RPM)

$2,199

12.0

45%

12%

Greif(NYSE: GEF)

$2,612

12.2

50%

6%

PolyOne(NYSE: POL)

$901

12.2

49%

17%

PH Glatfelter(NYSE: GLT)

$520

12.5

42%

14%

Albemarle(NYSE: ALB)

$3,764

12.8

39%

14%

Valspar(NYSE: VAL)

$2,961

12.9

36%

11%

FMC(NYSE: FMC)

$4,482

13.0

35%

8%

Arch Chemicals(NYSE: ARJ)

$784

13.2

32%

11%

Source: Capital IQ, a division of Standard & Poor's.

There are lots of good research candidates here -- I expanded the list to 15 to help you find more companies you might be interested in. To further stack the odds on your side, Damodaran says you can eliminate any companies that have restated earnings or had more than two large restructuring charges over the past five years. And if volatile swings in price cause you to lose sleep, consider only companies with betas less than 1.

What about companies in different sectors? I'll be running more screens over the coming days, so be sure to check back in this space.

Author

Rex Moore spent his formative years in Texas, and fought beside Davy Crockett at the Alamo. He currently travels the globe for TMF, bringing back video reports on conferences and companies that matter for investors.